The Covid-19 Pandemic emerged out of nowhere globally at the beginning of the year 2020. To minimize the spread of the contagious disease, nations around the world declared lockdown which affected the economic operations. India, being no exception dived into deep contractions. In the first quarter of 2020-21, the nation witnessed a historical technical recession with a contraction of 23.9% in the April - June 2020 quarter.
Here we will examine the Indian Macro Figures and the impact of Covid-19 on Indian industries. Due to the long lockdown period which was a needed move from health perspective, the industries and businesses suffered. People from both the formal and informal sectors lost their jobs. This resulted in lack of stable income. The population below the poverty line struggled in fulfilling basic household consumption as well which has also affected Aggregate Demand and Investment. To fight the situation and support the people in distress, the Central Government should introduce the Economic and Finance Stimulus Package. We will comprehend the role of previous policies. Also, we outline six points to revive the Indian Economy.
The first case of Covid-19 in India was reported on 30th January 2020. Within a month, the number of cases rose at a rapid rate. To control the spread of the pandemic and break the chain of infection, night curfews in few states followed by nationwide lockdown was announced by Prime Minister Modi on 23rd March 2020. The lockdown initially for 21 days was extended several times.
"Special emphasis was led on the “Aatmanirbhar Bharat” campaign to make the population and the nation self-reliant."
The restrictions implemented on the movement of individuals and the operating of businesses resulted in an economic slowdown and adversely affected the livelihood of daily wagers. Gradually, the government introduced several relaxation measures and ‘Unlock' with several guidelines.
The geographical area and cities were further categorized under the following categories – Red Zone, Orange Zone, and Green Zone – defining the spread of the virus. The containment zones witnessed more restrictions as compared to Green Zone. Due to unexpected lockdown, several migrant workers got stuck and lost their source of income as well. On April 29, 2020 the government permitted inter-state movement of stranded people, including migrant workers.
On May 12, the Central Government announced a relief package of around 10% of GDP. The package amounted to INR 20 Lakh Crore Stimulus Package and included Foodgrains to Poor, Cash benefit to poor and elder women, loan interest rate cuts, etc. Special emphasis was led on the “Aatmanirbhar Bharat” campaign to make the population and the nation self-reliant. The central Government issued several guidelines for “Unlock” and the final guidelines arrived on 30th September 2020 for “Unlock 5.0” where the permission to take decisions was passed on to UT and state governments.
With the emergence of second wave, lockdown was imposed by many states in the month of April and May 2021. Further, the Growth In Core Index infected population in the affected zone struggled with acquiring hospital beds and oxygen cylinders on time. To control the health hazard and maintain economic stability both at same time, the high vaccine roll-out was recommended. On January 11, 2021, the Prime Minister announced the start of the world's biggest vaccination campaign from January 16th aiming to vaccinate about 300 million people in the coming months.
Indian Macro Figures
As per data released by National Statistical Office (NSO) on 31st May 2021 about the national income, the real GDP (Gross Domestic Product for FY 2020 - 2021 contracted to 7.3%. In the last quarter of the financial year, the economy showed improvement and exhibited a growth of 1.6%. The sharp fall in the Covid cases across the nation improved the performance of several industries.
Construction, manufacturing, financial services, and agriculture showed positive Gross Value Added (GVA) growth in the fourth quarter. The highlighted performance of major sectors in the last quarter and key takeaways are as follows -
- Manufacturing Sector witnessed a growth of 6.9%.
- The construction sector rose by 14.5%.
- Service Sector witnessed peripheral growth of 1.5%.
- India witnessed an annual contraction after 40 years.
- Last time GDP contracted by 5.2% in FY 1979-1980.
Purchasing Managers' Index (PMI)
PMI is an economic indicator derived from monthly data and utilized to study business conditions. It helps economists to correctly foresee changing economic trends. The PMI of the Manufacturing Industry of India showed growth to 50.8 in May 2021, followed by a shrink to 48.1 in June and growth to 55.3 in July 2021. PMI for manufacturing showed a decline after 11 months in June 2021. Factors responsible for improving index can be:
- Uplifting of Government Restrictions
- Strengthening International Demand
- Improvement in Demand
The PMI of Service Industry contracted for three consecutive months and improved marginally reaching to 45.4 in July. The PMI Index of Service Industry is expected to increase with vaccine roll out at high rate. Factor responsible for current index –
- Contact Intensive Nature of the Industry
WPI measures the price of representative basket of wholesale goods. The Index is commonly used by economists to compute the inflation rate. Key takeaways of recent WPI are -
- India touched its record high inflation rate – 13. 1% in May 2021.
- The inflation rate decreased in July 2021 and reached to 11.2%.
- Rise in price of crude oil is one of key factors of high inflation.
- Fuel and Power Index increased to 26% in July 2021.
Index of Industrial Production (IIP) -
The Index of Industrial Production (IIP) shows the growth rates in different industry groups of the economy in a specified period. The IIP index is published by the Central Statistical Organization (CSO) monthly. Key takeaways of recent IIP are -
- IIP witnessed a contraction of 16.6% in June 2020 due to nationwide lockdown.
- FY 2020 has been taken as a base year for computation June 2021 IIP.
- Positive growth of 13.6% has been observed this year.
- Core sector output incorporating six sectors witnessed 8.9% growth.
- States were impacted by the second wave in the April and May months of 2021.
Travel Sector -
In the majority of countries, travel is the most affected industry due to its contact-intensive nature. Since the announcement of lockdown followed by restrictions and guidelines imposed by the Government, the population has limited movement from one place to another. This has affected Hospitality Industry as well. The data of travel can be studied according to sectors – Airways, Railways, and Passenger Vehicles. Key Takeaways of impact on travel sector are –
- Railway Freight Traffic was recorded lowest in April 2020.
- The freight traffic increased by 18.4% in July 2021.
- Automobiles sales showed a decline amid restrictions on traveling.
India's Response to Crisis -
Immediate Lockdown Announcement in March 2020 was highly unexpected but definitely much needed from health perspective. In order to control spreading of the virus, a lockdown was imposed.
But poverty is another concern in a developing country like India where a good number of the population work on a daily basis to fulfill their regular needs. To curb the lack of income and to support the MSMEs, the Central and State governments introduced several schemes and dealt with the conditions on multi-level. India's Response to Crisis can be further studied in four categories: -
- Containment Measures
- Fiscal Support and Demand Push Measures
- Financial Measures
- Structural Reforms
Containment Measures -
Amid the surge in Covid-19 cases, the containment measures are initiated which is popularly known as 5-fold-strategy including – Test, Track, Treat, Vaccination, and Covid 19 appropriate behavior. To monitor and control the spread of contagious disease, the government imposed restrictions on large gatherings. Occasions such as Weddings, Political Rallies, Death Rituals, Festival Celebrations etc were limited with a cap of a confined number of people. Further, districts were distinguished and classified according to the number of prevailing Covid cases in the particular region. The area with more cases is classified as a contaminated zone and bears more restrictions.
Fiscal Support and Demand Push Measures -
Employment Measures :
- Wage Increase for MNREGA Workers from INR 182 to INR 202. The wage increase benefit 50 million families and additional INR 2000 per worker.
- Atmanirbhar Bharat Rozgar Yojana – EPFO benefits for new employees.
- Prime Minister Garib Kalyan Yojana to boost employment in rural area. Allocated budget of INR 10,000 Crore to encourage growth of informal sector in rural India.
Public Distribution Scheme (PDS) :
- Pradhan Mantri Garib Kalyan Yojana covered around 66% of the population for the food scheme.
- Additional 5kg of wheat and rice distributed along with the previous allocation of 5kg for three months.
- Under the scheme, 1 kg of preferred pulses given for three months.
- PDS could be availed in two installments.
Transfer of Directs Benefits :
- Senior Citizens, Widows and Disabled eligible to receive ex-gratia amount of INR 1000 for three months in two-installments.
- 200 million Women with Jan-Dhan Account received INR 500 every month for three months to run their household.
- 83 Million Women with families under Poverty Line received free LPG Cylinder for three months.
- Collateral Free Loans amount doubled for 6,30,000 SHG (Self Help Groups).
- State Welfare Fund used to help building and construction workers.
Financial Measures -
Tax Related Benefits :
- To increase the disposable income, the TDS (Tax Deduction at Source) for non-salaried payments reduced by 25%.
- Income Tax Return date for FY 2019 – 2020 extended to 31st December 2020.
Emergency Credit Line Guarantee Scheme -
A relief fund for struggling sectors to help them in sustaining employment. Under the scheme, a credit guarantee of Loans is provided to identified sectors in Distress. Till Now, financial Institutes have disbursed INR 2.13 Lakh Crore under Government Guarantee Repayments.
Organized Sector – Social Security -
- Employees with EPFO could withdraw 75% of the account balance or three months of salary – whichever is lower.
- Subsidy support for New Employees covering 65% of employees and 95% of formal sector establishments.
- Establishments with less than 1000 employees where 90% of employees earned INR 15,000 per month covered by the government for EPF contribution of both employer and employee from March 2020 to August 2020.
- Pension Fund Regulatory and Development Authority (PFRDA) allowed partial withdrawals from the NPS to fulfill financial needs for treatment of COVID related illness.
RBI Measures to promote Liquidity -
- Relief measures on Loan and Debt Repayments through deferment of payments.
- Policy Repo Rate reduced to 4.40% from 5.15%.
- CRR (Cash Reserve Ratio) of all banks reduced by 1% resulting in the release of liquidity to INR 1,37,000 Crore.
- LCR (Liquidity Coverage Ratio) reduced to 80% from 100%.
- Aim of injecting liquidity worth INR 4.74 Lakh Crore to the economy.
- Open Market Operation (OMO) purchase auction of INR 20,000 Crores.
- Banks Limit of Borrowing overnight increased under Marginal Standing Facility (MSF).
Benefits to MSMEs -
- Collateral Free loan with 100% Credit Guarantee worth INR 3 Lakh Crore.
- Subordinate Debt for Struggling MSMEs amounting to INR 20,000 Crore.
- Equity Infusion for MSMEs amounting to INR 50,000 Crore.
- Investment Limit revised upwards.
- E-Market Linkage introduced in absence of trade fairs due to Covid 19.
- MSMEs dues cleared within 45 working days.
Structural Reforms -
Infrastructure Development :
- The budget allocated of worth INR 7.8 Million through Pradhan Mantri Awas Yojana for infrastructural development of rural India.
- Prime Minister Awaas Yojana Urban (PMAY-U) with an additional budget of INR 18,000 Crores.
- Equity Infusion of INR 6,000 Crores with National Investment and Infrastructure Fund (NIIF).
Healthcare Benefits :
- Pradhan Mantri Garib Kalyan Package – Insurance Scheme for Healthcare workers fighting Covid-19.
- Pradhan Mantri Jan Arogya Yojana providing an insurance scheme covering secondary and tertiary health services for poor.
- Operationalization of 1,50,000 health and wellness centers by the end of 2022.
- Free Vaccination – Covaxin and Covishield for everyone.
Policy Dilemmas Underlying Covid-19 -
Lives vs Livelihood :
Initial traces of the Covid-19 virus in India were discovered in western and southern parts of the nation. Due to the contagiousness of the disease, the virus spread at a rapid pace, and by June 2020, a high number of Covid-19 patients were reported all over the nation. The dilemma of Livelihood vs Lives struck where the authority chose to save lives first by "flattening the epidemiological curve". India being a developing nation doesn't have a developed healthcare system. Not having enough means of providing treatment to the newly found virus was another matter of concern. Lockdown period aided the respective ministries including railways to bring structural changes and convert railway compartments into healthcare facilities.
Also, the nation opted for several non-pharmaceutical interventions (NPIs) to obstruct the chain of spread. Awareness Campaigns were introduced such as - "Do Gaj Doori, Mask Hai Zroori" to promote the population to follow social-distancing guidelines and wear Masks. Infected Individuals with mere symptoms stayed in Quarantine. The above-mentioned steps helped in flattening the infection curve but steeped the macroeconomic recession curve.
Demand and Supply Shock :
The sudden lockdown triggered both demand-side and supplyside shock. Due to loss of income opportunities and fear of contagion at contact-intensive activities, the demand side suffered. Population with low income consumed less with a motive of precautionary saving. Further, restrictions on movement and economic activities led to supply side shock. The economies faced twin-economic shocks due to pandemic and are now stuck in Hysteresis effects – households demand less due to lack of income, industries manufacture less due to less demand, at the end employment opportunities are not generated and households don't get employment and income opportunities.
India's Pathway to Economic Revival :
Pandemic disrupted the economies around the world including India. The economies are striving to recover and taking measures on Multi-Level.
In previous sections, we discovered the fiscal and financial measures taken by the Government and Central Bank. Also, we comprehend the policy dilemmas obstructing the recovery process. India needs to tackle the economic crisis more aggressively and the following measures can be taken.
Public Distribution System for 12 Months :
As per data of 2017-2018, the rural household spent 33.2% and urban households spent 22.4% of total income on household consumption. One of the key-method for reviving the Indian Economy is universalizing the PDS and making food easily available for the poor class. As per the data, a major proportion of household income is spent on food items. By making food available to as many people as possible, the income can be saved resulting in enhanced purchasing power. Also, it would aid in achieving economic equality with re-distributive measures.
As per a report by FCI (Food Corporation of India), the availability of Rice and Wheat as of September 2020 in the Central Pool is around 70 million tonnes (MT). By adding coarse grain, the amount increase to 81.11 MT. As per analysis and computation, the nation requires 66 MT of food grains to sustain universal PDS for six months. Currently, Central Pool has more than that and hence temporary PDS can be achieved.
India is a country with per capita monthly income of INR 11,185. By getting food security covered, a major part of household expenditure would be saved and further utilized for other purchases.
Along with this, PDS will act as a savior for the one in need as the individuals with a secure wage rate won't bother standing in a queue for few kilograms of food grains. This fundamental makes PDS with minimal leakages and maximum benefits. Tamil Nadu and Chhattisgarh are among the states with low leakages in PDS.
In addition to this, an upward movement in the price of primary goods has been observed. By introducing Universal PDS, the prices can be monitored in the current recessionary situation.
Improving Employment Opportunities in Urban Areas -
MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) was launched in the year 2006 and witnessed its maximum utilization in the first half of FY 2020-2021. The highest recorded utilization can be linked to the migration of workers from an urban area to rural India back to their hometown. Currently, the central government is focusing towards reversing migration.
With the lockdown, the business activities got obstructed and many workers faced job loss. With the shrinking GDP, job opportunities are also expected to decrease. The current circumstances require generation of more employment opportunities to absorb the migrant workers in the rural area. In spite of its paramount importance, the objective is hard to achieve. For this, the employment guarantee scheme needs to be introduced in urban areas.
States including Odisha, Jharkhand, and Himachal Pradesh have announced such employment guarantee schemes and allocated a budget of around INR 200 Crore for the same. But the allocated budget by the state government is not adequate and requires the contribution of the central government to widen coverage.
This policy will enhance the purchasing power of individuals and also promote consumption demand. Also, it can be a great initiative to stabilize urban wages. The central government can adopt this scheme to plan and execute smart city projects. It is to be noted that implementation of this project can't be conducted everywhere immediately. On the initial level, around 10-15 non-metro cities can be targeted. Also, the area of scheme can be enhanced to more cities in upcoming years.
Direct Benefit Transfer Package -
As per data disclosed by National Accounts Statistics, around 52.4% of the country's population is working in various informal sectors.
As per World Bank Data, the Indian Workforce size was 494,261,397 in 2019. On the computation of 52.4%, we can conclude that 258,992,972 workforce is engaged in the informal sector which got affected due to lockdown.
In India, roughly one-third of the population is engaged in some kind of wage-earning activity. This means the rest of the two-third population is dependent on the first part. On the above-mentioned computation, we discovered that around 26 Crore of the population suffered and lost earning-source because of Covid-19 Lockdown. Even if, we make the number 50% and consider it the people in the most-distressed situation, the number stands to 13 Crore. Adding two-third of the dependent population, we can conclude that 39 Crore people are in a distress situation.
The March relief package introduced by the government consisted of DBT to 80 Crore population in various categories. Although, the amount discussed was not sufficient and as per the SBI Ecowrap report, the funds could satisfy only one-third of the people in distress.
The loss of a job due to COVID is not limited to the informal sector only. As per the Centre for Monitoring Indian Economy (CMIE), around 121 million individuals lost their jobs in the month of April 2020. The job conditions and employment opportunities are improving now. But still, a high number of people are struggling with getting a stable income.
It won't be wrong to say that the Pandemic has not only affected the poor but a high number of the working class as well. It is high time to introduce a powerful package of DBT covering a wider population. The execution of the plan and identification of individuals in need won't be easy. But the target can be achieved with coordinated efforts of central and state government. The DBT will provoke purchasing power and enhance the aggregated demand.
Input Tax Relief to Producers of Selected Sectors -
In consideration of estimates of Index of Industrial Production (IIP) and use-based index of July 2020 presents the fact that industrial production of the country continues in distress. The monthly sectoral rates of industrial production with the base year 2011-2012 showcased positive rates in the month range of May-July in Pharmaceuticals only. Along with this, Tobacco witnessed 6.1% growth in July. The rest of the sectors have witnessed a contraction in production growth. The top ten producing sectors presented a double-digit growth contraction.
Industrial Production with positive growth includes Pharmaceutical and Tobacco only which is merely 5.8% of overall production. To improve aggregate performance, other sectors also need to perform positively. Usually, Corporate Tax Concessions are provided to induce production. But it is to be noted that prevailing distress is the amplified version of existing Industrial distress before March 2020. Further, contraction in Industrial Production is triggering unemployment.
To deal with the current situation, the government needs to reduce or eliminate input tax and motivate industries with Input Tax Concessions. The Government is in no position to provide Input Concession to all industries at one time. For starters, the top 5 industries including metals, oil, chemicals, processed food, and automobiles can take advantage. Later on, the mentioned industries can be replaced with the other five industries.
In the primary reviving steps, the focus has been led on generating demand by inducing purchasing power. By lowering Input Tax, the supply side can be triggered and more employment opportunities can also be generated. In totality then it can revive a good part of the investment demand.
"To deal with the current situation, the government needs to reduce or eliminate input tax and motivate industries with Input Tax Concessions."
Induce Public Investment -
At crucial times like the Covid-19 recession, it won't be appropriate to expect the private sector to come to the rescue that too when they are striving through the situation themselves. Investment by Public Sector is of esteem importance to generate the demand – at least for some time. India has always struggled with infrastructure which also impacted manufacturing and failure of some industries.
In times like this, inducing Public Investment in form of improvement of Infrastructure can aid in reviving the economy. Also, the availability of good infrastructure would boost Foreign Direct Investment. Aggressive infrastructure investment is recommended for the next year. The current international relationship instability in China has shifted the focus of developed economies towards India. A good infrastructure would motivate the investors. Also, we can expect betterment in exports with improvement in Infrastructure.
Building infrastructure will also create employment for blue-collar workers which would further increase their purchasing power and enhance aggregate demand. Through the multiplier effect, it would further induce more investment. Under Infrastructure Vision 2025, the central government presented USD 1.5 Trillion for the National Infrastructure Pipeline that too before the emergence of the Coronavirus Pandemic. Better connecting roads for rural India, Digital Infrastructure, healthcare facilities, modern connectivity etc are going to transform and play a crucial role in the long run.
Put Fiscal Responsibility and Budgetary Management (FRBM) Act on Hold -
FRBM Act mandates the fiscal space of the nation. The current situation promoted the central government to increase the budget deficits by 0.5% in the financial year 2019-2020 and 2020-2021. At this point in time, the nation requires quick financial decision-making and necessary investment to bring the economy back on track. Also, India needs to give a Fiscal push and opt for debt financing to strengthen the economy.
Currently, India's Fiscal Deficit Target stands at 4.6% which is above the mandated target. FRBM Act can delay the decisions which the nation can't afford at this point in time. This comes with a potential Macro Instability Risk. However, to achieve the expected growth and revive the Indian economy, FRBM needs to be put on hold for at least one year.
SPV for investing in corporate bonds -
The creation of a fund or SPV with corpus of Rs 1.4 - 1.6 lakh crore which will subscribe to NCDs/Bonds of Corporates rated A and above. The fund can be seeded by the Government contributing Rs 50,000 crore, with further investments from banks to the tune of Rs 40,000- 50,000 crore and balance Rs 50,000-60,000 crore brought in by financial institutions such as LIC, PFC, EPF, NIIF, IIFCL et al.
Discom bailout -
The state-run electricity distribution companies have been accumulating losses and their bailout has become necessary, as state governments are not able to bear the loss. An allocation of Rs 2 lakh crore can be made, of which Rs 1 lakh crore is disbursed immediately and a similar amount later, when distribution companies fulfil their reform targets.
Bank recapitalisation -
Given that liquidity has dried up for almost all industrial units especially for MSMEs, there is a high likelihood of defaults on debt servicing by industry. The current exposure of banking sector (as on 27 March 2020) to private corporate sector including MSMEs are at Rs. 29.05 lakh crores of which 4.87 lakh crores are for MSMEs. Given the likelihood that, the unprecedented economic crisis in the real sector would soon transmit to financial sector, it would be prudent to allocate adequate backup in terms of allocation for recapitalisation of banks to ensure that the banking system maintains strong capital adequacy as a backup for potential bad assets that may creep into the banking system. Hence an allocation of Rs 2 lakh crores for bank recapitalisation would be prudent to manage any surge in NPAs of public sector banks.
Coronavirus Pandemic was an unseen disaster that affected the global economy badly and has changed the world economy. Like every nation, India also struggled with the dilemma of life vs livelihood. To support the people and businesses in distress, many financial measures were introduced. Considering the high population, the efforts were not enough.
The situation is improving with the high vaccine rollout, still many economies are wandering what recovery could look like. The number of job opportunities is still very low. Thousands of individuals who worked in the tourism and hospitality industry have come to a near standstill.
In light of the scale of disruption caused by the pandemic, it is evident that the current crisis is different from recessions. The Government needs to take major steps and follow an aggressive revival strategy.